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Sequestration Drama: Much Ado About Nothing?

President Barack Obama faces the dismal task of cutting spending on everything from teachers to the Securities and Exchange Commission. (Image credit: AFP/Getty Images via @daylife)

Sequestration. Does the man on the street have any idea what it all means?

School departments looking for more money won’t get it. President Obama told us this week that airports will be more cumbersome for travelers due to cutbacks in the government run Transportation Security Administration, the dreaded TSA.

There is no doubt that the $1.2 trillion in spending cuts ($85 billion this year) will have a significant impact in a number of areas. The Congressional Budget Office predicted it could mean 750,000 fewer jobs (mostly government jobs; both state and local) by the end of the year and cut into GDP by 0.5 percent. In fact, must of the see-saw unemployment figures of late have come at the heels of layoffs from government entities like the U.S. Post Office.

So what does sequestration mean? It means significant cuts to Head Start programs for low income children who have no money for pre-school education and end up in kindgergarten or first grade behind their classmates who had it. It means cuts to special education programs in public schools, police, fire, research funding, public housing, the Securities and Exchange Commission will have less teeth (so much for FinReg having enforcing power) and military operations will be cut by $13.5 billion. Airport security and immigration enforcement will be cut by an estimated $323 billion each, and border security will be cut by about $581 million.

Alas, most of us are not directly affected by sequestrations, which is why Obama has sought to put the focus on issues like air travel. Every American understands what it means to wait in line and miss their flight. And summer’s coming.

But, says Paul Hoffmeister, economist at the boutique investment research firm Bretton Woods Research LLC, any negative economic impact of the spending cuts will be negligible.

“The Democrats’ fear-mongering is based on Keynesian economic arguments that less money in people’s pockets will reduce economic growth,” he says, calling that “nonsense.” The sequestration spending cuts will have virtually no impact on reducing incentives by corporations and entrepreneurs to invest, and therefore they will have no meaningful impact on the economy and stock market. Any hit to GDP data will be marginal , he argues.

White House advisor Gene Sperling is now arguing that the negative impact of the initial sequestration cuts will be gradual.

The most important aspect of the sequestration debate in Washington is whether Democrats will prevail in winning tax increases in exchange for spending cuts (or reforms). If they do, then growth and stocks could be threatened, says Hoffmeister. But given the tax-related ideas floating in Congress, it is very difficult to imagine that such a scenario would include broadly dangerous, anti-growth tax increases.

In other words, for some people who depend on the government coffers for employment and their pension, sequestration is an individual problem. For the nation, according to supply-sider Hoffmeister, it is not the end of the world. Republicans would be wise to avoid any shut down of Congress as the debate over taxes heats up. Indeed John Boehner has said he is not going the way of Newt Gingrich in his Contract With America shutdown during the Clinton years in the 1990s. Even Newt himself said such a move would be a bad idea, and bad press for the already diluted Republican Party.

“The Democrats may play hardball…in an effort to win a grand compromise on sequestration,” Hoffmeister says. ”But the odds of the Democrats forcing a shutdown are small. For now, we view the sequestration drama as much ado about nothing for the economy as long as serious tax increases are not considered.”

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